As some of you might know, we recently made the decision to purchase a condominium. As the unit is still under construction, we won’t be able to move in until sometime in January. The long period of delivery posed a problem when attempting to get a mortgage approval from traditional places such as ING Direct, so we got the approval done with the builder’s associated bank. This streamlined the process, and provided us with two options to take in January:
- A 3 year fixed rate mortgage at 3.15%.
- A 5 year variable rate mortgage at prime – 0.3%. With the recent bump in prime rates to 2.75%, this means that the variable rate would currently stand at 2.45%.
We currently have the choice of taking the three year fixed rate mortgage, at 3.15%, or the five year variable rate mortgage, at 2.45%. This rate could still increase between now and January.
The advantage of taking the fixed rate is that it provides insurance against interest rates going up by more than 0.70% over the three years, as well as emotional peace of mind from the stability of the rate. In order for the two to break even, however, the rates would have to go up by even more than that, because for a period of time we will be paying down the mortgage faster with the variable rate.
There is also the alternative of renegotiating the variable rate as we get closer to the closing date. I have read about others getting prime rate – 0.6%, so it would seem that prime – 0.3% is not a very good deal at all.
I haven’t yet crunched the numbers for this specific scenario, but I don’t quite see rates rising by more than 1% from 2011 to 2014. I could be wrong, of course, but I still see too much weakness in the global economy, overall. Even if we go for the fixed rate and rates somehow skyrocket, we’ll still have to pay the piper his dues once the three years are up. Past analyses have favored the variable rate, and I am still quite partial to taking a variable rate in January. Either way, it looks like mortgage rates are going up, and we’re going to have to accept that.
I will be asking my mortgage advisor to prepare a new amortization chart for us as we near the closing date. An amortization chart is one good way of analyzing the differences between a fixed rate versus a variable rate, over the period of time being considered. Most mortgage advisors will prepare this for you upon request. If one option results in a lower balance at the end of the term, the monthly payments being equal in either case, then that option could make more sense for you.
So, what do you guys think? Are we getting shafted on our variable rate? Although the 3 year fixed rate is slowly looking more attractive, is it still a ripoff? Which option is more likely to increase our expected value? Please let me know what you think!